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Monday, 9 August 2010

Islamic banks advised to capitalise on inherent strengths

KARACHI: Acting Governor State Bank of Pakistan, Yaseen Anwar, said Islamic financial system has potential to provide better banking and financial services than the conventional system.

However, he added, the Islamic system would have to capitalise on its own inherent strengths and avoid following the conventional system, he said while addressing the inaugural session of Islamic Financial News Roadshow on Islamic Banking held at SBP Headquarters here on Thursday

Anwar Yaseen said that the current Islamic banking paradigm, both in Pakistan and elsewhere, is based on replication of conventional banking products. While the replication of conventional products to make them Shariah compliant does pass the Shariah permissibility test, they are insufficient to achieve the larger objectives of Islamic financial system, particularly the broad-based and equitable distribution of economic gains.

He asserted that total reliance of Islamic banks on debt-based fixed income products and minimizing the risks to almost close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts.

Thus, for sustaining the growth momentum, the industry will have to diversify its products mix by focusing on areas where it has comparative advantage rather than blindly following the conventional system, he observed.

While giving an example of Pakistan, Anwar said that 67 percent of Islamic banks’ financing in the country is concentrated in the corporate sector through murabaha, ijarah, and diminishing musharaka.

With most of the corporates having banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract the corporate clients, he said, adding that while this improves the quality of their financing portfolio, it reduces their profit margins and inhibits their ability to offer better returns to the depositors, he emphasised.

It also restricts the access to finance to the well-established businesses and corporates and leaves the SMEs and start up businesses financially excluded.

This is contrary to the natural business model of Islamic finance, which promotes risk and reward sharing and encourages financing to promising start-ups that is critically important for promoting entrepreneurial culture, he said.